Monopsony in the Input Market

Monopsony (mono = one; opsonia = buy) means that there is only one buyer. In the labor market, this means that there is only one buyer of labor. In countries where the government operates the health care system, it is, in effect, a monopsonist on, for instance, the market for nurses. The analysis of monopsonies parallels the one of monopolies. Suppose, again, that there is perfect competition in the output market and that that there are many sellers of labor. However, there is only one buyer of labor. If the monopsonist increases the wage, she must do so for all workers, even the ones she has already hired. Thereby, her marginal cost of hiring one additional unit of labor is higher than the wage to the last worker. Since the monopsonist is the only buyer in the market, she faces the whole supply of the market. (Compare to the monopolist, who faces the whole demand of the market.) Her marginal cost of labor, MC_L, will therefore have a steeper slope than the supply curve (see Figure 16.4).

As in the other cases, the monopsonist hires workers as long as she gets higher revenues from doing so than she has to pay in wages. Now, since MC is not equal to the wage any more, she does so as long as MRP_L > MC_L. In equilibrium

We had that MC_L = w. Now, however, we have that MC_L > w. In Figure 16.4, the monopsonist hires L_M workers and pays a wage of w_M. Comparing to the case when we have competition in the labor market, we see that the wage in a monopsony, w_M, is lower and that the firm hires fewer workers, L_M < L_C. This parallels the results from the monopoly market, where the monopolist produced a smaller quantity than a perfectly competitive market did, and charged a higher price per unit.

Bilateral Monopoly

A bilateral monopoly is a situation in which there is only one buyer and one seller. Both parties will then have market power, and the outcome depends largely on negotiations, the business cycle, etc. This resembles the situation in some countries where there are centralized negotiations between unions representing the workers and other organizations representing the employers.

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